(Reuters) – For three years, Akio Toyoda has had to steer Toyota Motor Corp (7203.T) through one crisis after another, from a damaging safety recall that took up to 10 million cars off the road to last year’s devastating earthquake and tsunami.

Now, the 56-year-old grandson of the automaker’s founder is ready to go on the offensive.

With Toyota’s U.S. dealerships humming again, Toyoda and his aides have sketched out a strategy in recent weeks aimed at stripping costs from everything – from production lines in Japan to Mississippi to the years of design and engineering that go into producing new vehicles and parts.

The goal is to push up profit margins even as Toyota rides a wave of recovering demand while tapping into its tradition of incremental improvement – or “kaizen” – the corporate creed that once made it the world’s most feared and studied manufacturing enterprise.

At stake is Toyota’s ability to keep building some 3 million vehicles a year in Japan – roughly triple the equivalent output at Nissan Motor (7201.T) and Honda Motor (7267.T) and about 40 percent of the cars and trucks Toyota builds globally.

The first down-payment on Toyota’s emerging plan comes on Wednesday with earnings for the just-ended fiscal year and its forecast for the current year.

Senior executives pull no punches about both the scope of the challenge Toyota faces and how it lost its way when demand was booming. In the key markets of China, Brazil, Russia and India, “we’ve let Volkswagen (VOWG_p.DE) and Hyundai Motor (005380.KS) take the lead,” Toyota Executive Vice President Atsushi Niimi said recently.

In the United States, a market where Toyota’s reputation for quality with vehicles like the Camry was once unassailable, the Japanese firm is under pressure from both the rapid rise of South Korea’s Hyundai and the recovery of the Detroit automakers, Niimi said.

And in Japan, Toyota is handcuffed by a strong yen, costly labor regulations, high corporate taxes and an energy policy deadlock that has shut down all Japan’s nuclear reactors, driven up costs and raised the prospect of summer blackouts.

But the failure that stings most for Toyota executives was self-inflicted.

MARGIN ENLARGING

When Toyota was racing to add factories to meet booming demand in the last decade, it stopped finding new ways to make the process better. “We hardly achieved any innovation in production engineering,” said Niimi, noting a more flexible assembly line design promises to cut by 40 percent the time it takes to switch models on the floor.

Skeptics believe Toyota will have to take more drastic action than turn around by a thousand cuts.

“What we need to see now from Toyota is further cost cutting, a shift of production out of Japan so they can compete on prices,” said Julie Boote, auto analyst at UK-based research firm Pelham Smithers.

Importantly, although Toyota’s sales and production have come roaring back, analysts still expect it to trail both Nissan and Honda as well as overseas rivals in operating margin.

Toyota is expected to forecast a more than quadrupling in operating profit for the year to next March, according to a survey of analysts by Thomson Reuters I/B/E/S. That would put Toyota’s operating margin near 4.8 percent from an estimated 1.8 percent for the year just ended.

While that would set Toyota within reach of its target of at least a 5 percent margin before 2015, it would fall short of Nissan’s 7.1 percent margin and 6.5 percent at Honda, the Japanese automaker that was slowest to recover from last year’s lost output, and lag well behind Hyundai’s 10 percent margins.

WAR ON WASTE

To do better, Toyota executives say they have gone back to war against waste – or “muda” – one of the key components of the automaker’s vaunted production system.

At a factory tour in Toyota City last month, Toyota showed off some of those innovations, including an assembly line that can be more rapidly reconfigured during model changes. The technique, developed in Japan, has been adopted at the Mississippi plant that builds the Corolla and factories in India and Changchun, China.

At the same time, Takeshi Uchiyamada, the Toyota executive vice president who heads engineering and research, wants to cut vehicle development costs by more than a fifth, in part by driving for a greater use of common parts.

The use of shared parts across a range of models allows automakers to cut the procurement costs on items that customers don’t see or necessarily appreciate like the metal brackets that hold seats in place.

While Toyota was once considered a benchmark of success in that area, rival automakers now look to follow VW’s progress in using a wide range of shared parts in both its luxury Audi and mass-market Volkswagen brands.

The reforms at Toyota come with the automaker showing signs of new momentum in the United States market – still its largest and most important. Toyota’s U.S. sales jumped 12 percent in April – though that’s still close to a fifth below the same month in 2008 before the financial crisis triggered the car industry’s worst downturn in a generation.